Southwest Gas Corp. has sued Oneok Inc. for unspecified damages after Oneok abruptly terminated a pending $1.8 billion merger between the two companies rather than risk taking on a $700 million lawsuit against Southwest Gas by rejected suitor Southern Union Co.
In its suit filed Jan. 24 in the US District Court in Phoenix, Southwest Gas accused Tulsa-based Oneok of breach of contract and fraud in its inducement and actions related to the merger agreement that would have formed the largest stand-alone gas distribution company in the US, with 2.6 million customers (OGJ, Mar. 1, 1999, p. 27).
Southwest Gas also sued Southern Union, an Austin natural gas distributor, seeking unspecified damages for breach of contract and interference with a contract as a result of Southern Union's efforts to block the merger with Oneok.
"Southwest Gas has been greatly damaged by the improper conduct of both Oneok and Southern Union in this complex, year-long process," said Michael O. Maffie, president and CEO of Southwest Gas, the fastest-growing US gas utility. "With this lawsuit, we hope and expect to recover the damages caused by the acts of the two utilities that were competing for our company."
The merger agreement provided that either party could terminate the proposal if certain conditions-such as obtaining approval by Arizona regulators-were not fulfilled by Dec. 14, said Oneok officials.
On Tuesday, Moody's Investors Service, New York, confirmed the Baa2 senior unsecured ratings of Southwest Gas.
Those ratings had been under review for possible upgrade since the end of August.
Although the rating outlook is stable, Moody's officials noted that Southwest Gas, based in Las Vegas, faces intermediate risk from the Southern Union suit.
Moody's gave Oneok a negative rating on its senior unsecured and subordinated debt and its trust preferred securities, however, ending a review for possible downgrade that began in December 1998 when Oneok announced its acquisition agreement with Southwest Gas. About $2.3 billion of Oneok's securities are affected.
Southern Union earlier sued both Southwest Gas and Oneok after Southwest Gas officials last May rejected as "unachievable" its unsolicited offer of $33.50/share in favor of Oneok's proposed $30/share. Some aspects of that suit applied only to Southwest Gas, however.
Oneok officials said last week they feared the company would acquire a $700 million liability if Southern Union won a judgment against Southwest Gas.
"We worked very hard to make this deal happen, but the bottom line is that, even if we assume that all regulatory approvals could be received in a timely manner, there is simply too much financial risk associated with Southwest Gas right now, and we have a responsibility to protect our shareholders from excessive risk," said Larry Brummett, Oneok's chairman and CEO.
Oneok officials denied that the decision to terminate the pending merger had any connection to opposition to the merger among members of the Arizona Corporation Commission (ACC) staff who on Jan. 4 recommended to delay the merger.
At that time, Oneok Pres. David Kyle said, "We recognize that the ACC staff has some concerns, but we are confident in our ability to resolve those concerns, especially since many of them appear to be based on false and misleading statements made by people who had their merger proposals rejected."
An ACC hearing on the proposed merger was scheduled for Feb. 11. The commission originally was to review the merger last fall, but was delayed by "concerns about Oneok's actions and fitness to serve in Arizona," said Southwest Gas.
"Oneok's attempt last Friday to withdraw its application before the ACC has brought the merger effort to a halt, since ACC approval is required before consummation of the transaction."
However, Oneok officials said the lawsuit filed by Southern Union against Southwest Gas in July, subsequent to the merger agreement, was one of the reasons given by ACC staffers for not approving the merger.
The merger had already been approved by holders of 79% of Southwest Gas' outstanding stock and by Nevada regulators.
Approval also had been recommended by the staff of the California Public Utility Commission.
Oneok officials said they are still looking for an acquisition, although there are no potential deals under discussion.
"Oneok's strategy of growth through acquisitions has not changed. We just won't be making this particular acquisition," said Brummett.
Moody's officials worry that any sizeable acquisition by Oneok will be financed by debt and that acquisitions of upstream or midstream operations will increase the company's exposure to commodity prices.
